Macroeconomics
The Fed's inability to stimulate the economy by reducing interest rates is known as the
zero lower bound problem.
If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be
$200 billion.
Assume that U.S. National Bank has no excess reserves and that the reserve ratio is 20 percent. If U.S. National borrows $5 million from a Federal Reserve Bank through a repo transaction, it can expand its loans by a maximum of
$5 million.
A reserve requirement of 20 percent means a bank must have at least $1,000 of reserves if its checkable deposits are
$5,000.
If P equals the price level expressed as an index number and $V equals the value of the dollar, then
$V = 1/P.
Which of the following describes the identity embodied in a balance sheet?
Assets equal liabilities plus net worth.
The central authority of the U.S. banking system is the
Board of Governors of the Federal Reserve.
As it relates to Federal Reserve activities, the acronym FOMC describes the
Federal Open Market Committee.
The discount rate is the rate of interest at which
Federal Reserve Banks lend to commercial banks.
Paper money (currency) in the United States is issued by the
Federal Reserve Banks.
A $20 bill is a
Federal Reserve Note
Which of the following does not explain what backs the money supply in the United States?
It is backed by gold.
Market Economy
Laisse Faire; essentially no oversight, where consumers and businesses interactions determine output through consumer sovereignty
The M2 definition of money includes
Savings deposits, Currency (coins and paper money) in circulation, Small-denominated (under $100,000) time deposits, Checkable deposits, Money market deposit accounts, and Money market mutual fund balances held by individuals
The securities held as assets by the Federal Reserve Banks consist mainly of
Treasury bills, Treasury notes, and Treasury bonds.
True or False: Interest rates and bond prices vary inversely
True
True or False: The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.
True
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by
a vertical line.
A restrictive monetary policy is designed to shift the
aggregate demand curve leftward.
Land
both literally land and also naturally occurring resources that are used by the economy
The reserves of a commercial bank consist of
deposits at the Federal Reserve Bank and vault cash.
Excess reserves refer to the
difference between actual reserves and required reserves.
Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is
directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.
The amount that a commercial bank can lend is determined by its
excess reserves.
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by
horizontally adding the transactions and the asset demand for money.
According to the Taylor rule,
if inflation rises by 1 percentage point above its target, then the Fed should raise their targeted interest rate by one-half a percentage point.
If the Fed wants to discourage commercial bank lending, it will
increase the interest paid on excess reserves held at the Fed.
The purchasing power of money and the price level vary
inversely.
The amount of money reported as M2
is larger than the amount reported as M1.
The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves
is larger, the smaller the required reserve ratio.
A fractional reserve banking system
is susceptible to bank "panics" or "runs."
Which of the following is not part of the M2 money supply?
large-denominated time deposits
A bank that has assets of $85 billion and a net worth of $10 billion must have
liabilities of $75 billion.
Purchasing groceries using a debit card best exemplifies money serving as a
medium of exchange
The transactions demand for money is most closely related to money functioning as a
medium of exchange.
Currency held in the vault of First National Bank is
not counted as part of the money supply.
The primary purpose of the legal reserve requirement is to
provide a means by which the monetary authorities can influence the lending ability of commercial banks.
The possible asymmetry of monetary policy is the central idea of the
pushing-on-a-string analogy.
The desire to hold money for transactions purposes arises because
receipts of income and expenditures are not perfectly synchronized.
If you place a part of your summer earnings in a savings account, you are using money primarily as a
store of value
Money functions as
store of value, unit of account, medium of exchange
The asset demand for money is most closely related to money functioning as a
store of value.
The equilibrium rate of interest in the market for money is determined by the intersection of the
supply-of-money curve and the total-demand-for-money curve.
The liquidity trap refers to the situation where
the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand.
In the 1990s and early 2000s, Japan's central bank reduced real interest rates to zero percent, but investment spending did not respond enough to bring the economy out of recession. Japan's experience is an illustration of
the liquidity trap.
The purchase of government securities from the public by the Fed will cause
the money supply to increase.
The asset demand for money
varies inversely with the rate of interest
Which of the following are all assets to a commercial bank?
vault cash, property, and reserves
Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?
Commercial bank reserves will increase.
Currency in circulation is part of
both M1 and M2
An increase in nominal GDP increases the demand for money because
more money is needed to finance a larger volume of transactions.
Since the 2008 financial crisis, the Federal Reserve has added a significant amount of which securities?
mortgage-backed securities
The claims of the owners of a bank against the bank's assets are called
net worth
Banks lost money during the mortgage default crisis because
of defaulted loans to investors in mortgage-backed securities, they held mortgage-backed securities they had purchased from investment firms, and homebuyers defaulted on mortgages held by the banks.
When the Fed loans money in exchange for government bonds being posted as collateral, this is known as a
repo.
The four main tools of monetary policy are
repos and reverse repos.
If the quantity of money demanded exceeds the quantity supplied,
the interest rate will rise.
Other things equal, if there is an increase in nominal GDP,
the interest rate will rise.
mixed economy
An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion.
Which of the following best describes the cause-effect chain of an expansionary monetary policy?
An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds increase by $40 billion, the
M1 money supply will decline and the M2 money supply will remain unchanged.
Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the
M1 money supply will not change.
Capital
Machines and automation that help workers make things
Which of the following is a difference between "quantitative easing" and ordinary open-market operations?
Open-market operations are done to lower interest rates; quantitative easing is done to increase the quantity of bank reserves.
law of diminishing marginal utility
The more of something you already have, the less useful more it is to you
Labor
Workers that operate within the economy
Economics Golden Rule
You will do anything so long as the Marginal Benefit of the next unit of consumption exceeds the Marginal Cost of consumption
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by
a downsloping line or curve from left to right.
When economists say that money serves as a medium of exchange, they mean that it is
a means of payment
If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as
a medium of exchange
When economists say that money serves as a unit of account, they mean that it is
a monetary unit for measuring and comparing the relative values of goods.
barter system
a system of exchange in which goods or services are traded directly for other goods or services without the use of money.
If you are estimating your total expenses for school next semester, you are using money primarily as
a unit of account
Command Economy
an overseer, committee or other governing body that directly decides what will be produced and sets output targets.
Bank panics
are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently.
Near monies
are certain highly liquid financial assets that do not function directly as a medium of exchange but can be readily converted into M1.
A bank that has liabilities of $150 billion and a net worth of $20 billion must have
assets of $170 billion.
In a fractional reserve banking system,
banks can create money through the lending process.
During periods of rapid inflation, money may cease to work as a medium of exchange
because people and businesses will not want to accept it in transactions.
The money supply is backed
by the government's ability to control the supply of money and therefore to keep its value relatively stable.
One of the strengths of monetary policy relative to fiscal policy is that monetary policy
can be implemented more quickly.
Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank
cannot safely lend out more money.
In the United States, the money supply (M1) includes
coins, paper currency, and checkable deposits
In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the
cyclical asymmetry of monetary policy.
An increase in the legal reserve ratio
decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
A commercial bank can expand its excess reserves by
demanding and receiving payment on an overdue loan.
Which one of the following is presently a major deterrent to bank panics in the United States?
deposit insurance
Reserves must be deposited in the Federal Reserve Banks by
depository institutions, that is, commercial banks and thrift institutions.
Overnight loans from one bank to another for reserve purposes entail an interest rate called the
federal funds rate.
Most modern banking systems are based on
fractional reserves
It is costly to hold money because
in doing so, one sacrifices interest income.
A contraction of the money supply
increases the interest rate and decreases aggregate demand.
The M2 money supply includes
individual shares in money market mutual funds
Entrepreneurship
innovation and investment
utitlity
the satisfaction, happiness, or general benefit of a good
The Federal Open Market Committee (FOMC) is made up of
the seven members of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Bank presidents on a rotating basis.
To say that coins are "token money" means that
their face value is greater than their intrinsic value
In defining money as M1, economists exclude time deposits because
they are not directly or immediately a medium of exchange.
Checkable deposits are classified as money because
they can be readily used in purchasing goods and paying debts
Goal of an economic system
to produce an output for as low a cost as possible, to maximize effective use of resources
